2008: How involved is Buffett in the ethical dilemmas facing subsidiaries?

AUDIENCE MEMBER: Good morning. My name is Okosh Vajay (PH), and I’m from India. I worship Mr. Buffett for his philanthropy, and I do hope to serve the Gates Foundation someday.

My question to Mr. Buffett is, what’s your level of involvement when one of your companies is faced with an ethical dilemma? For example, Fruit of the Loom’s competitors have sweatshops in Central America. So what do you do to ensure that you don’t fall into the same trap?

WARREN BUFFETT: Yeah. Well, we let our managers run their businesses. And we’ve got some terrific managers, not only in terms of ability, but I would say that what we have seen of the ethical standards of our managers has been extraordinary over the years.

That doesn’t mean there isn’t — there aren’t slip ups here or there. But taken as a group, over decades, I think that I’m very happy, in effect, turning over the keys, not only to the financial performance of the business, but in terms of how they behave.

And I would say that I think you’re quite wrong in terms of — Fruit of the Loom’s operations are conducted in absolutely terrific standards. John Holland is here. I’d be glad to have you meet with him later.

But we — we’re proud of our businesses and how they operate.

We do not give them elaborate guidelines. I write them a letter every two years, roughly, and I ask them to send me a letter telling who they think should be the successor if anything happened to them that night. I keep those letters around. Fortunately, they don’t come into play very often.

But I also tell them we’ve got all the money we need. It’s nice to have more money, but we’re not going to lack for money at Berkshire Hathaway.

We don’t have a shred of reputation more than we need, and we never want to trade away reputation for money.

So we give them that same message that was given in the movie, in terms of the Salomon situation, which is that not only do they behave in a way that conforms with the laws, but that they behave in a way where, if a story were written by an unfriendly but intelligent reporter, the next morning, in their local paper, they would have no problem with their neighbors, their family reading it.

And we run that in the movie every year, just because we like the managers to keep getting that message all of the time. There is no pressure from Berkshire’s corporate office to report X dollars per — of earnings in any quarter. They don’t give me budgets, so they don’t — there’s no feeling that they have to come through with given numbers or I’ll be embarrassed in public in terms of publishing earnings or anything of the sort.

We have no incentives to cause people to do anything that would go against their conscience or play games or cut corners or anything of the sort.

And, overall, I think it’s worked pretty well. It isn’t perfect. You can’t have 250,000 people in the city without having something going on at some point. And we do have 250,000 people working. But I’m not unhappy with our batting average.

Charlie?

CHARLIE MUNGER: Yeah. And, of course, Fruit of the Loom does have foreign plants, and we have no rule against that at all. We’ve got quite a few foreign plants now.

We don’t favor foreign plants. We just do whatever makes sense under the circumstances.

WARREN BUFFETT: Yeah, we had a shoe business I’ve written about in Maine, and we had wonderful, wonderful workers there. They were more productive than workers around the world.

But the United States was producing, 20 years ago, roughly a billion pairs of shoes a year, and we were a nation of Imelda Marcoses. I mean, it was wild.

And Brockton, Massachusetts, and you name the towns, revolved around the shoe business, as did a town called Dexter, Maine.

And we bought that business. And we tried to compete. We had a good brand name. We had great workmanship. And we found out that it just plain wouldn’t work against — competing against — shoes produced in China.

So now of the — it’s over a billion pairs of shoes a year used in this country. Basically they all come from outside the borders. And you’re going to see that.

And factories in China, factories in Central America — they do not have exactly the norms that we have in this country. And, you know, that’s going to be the situation.

We are — we will not — we are not going to tell the world how to run their business in any great way.

We — obviously we have some standards that have to be met, but we are not — they are not exactly the situation you are going to find in the United States.